State of the Industry Report September 2024

Developed alongside 11 of the world’s leading payments experts, CMSPI’s flagship report aims to empower merchants and advocates with the information they need to execute payments for their organizations in the market today. Want to understand how tokenization works, which payment methods to offer in different geographies, or why payments regulation differs by market? CMSPI’s Insights team has created the SOIR to be the first of its kind, developed with merchant input, to fuel merchant decision-making.

CMSPI – IAC State of the Industry Report

State of the Industry Report

September 2024

CMSPI – IAC State of the Industry Report

Contents Executive Summary

Section 3.2 – Card Network Rule CP and CNP Definitions

Section 3.2.1 – Why does the classification matter?

6 8

Section 3.2.2 – What is Card-Present and Card-Not-Present? Section 3.3 – Card-Not-Present Payment Challenges

Section 1 Overview – A Primer in Payments

Section 1.1 – A Model of Card Payments

Section 3.3.1 – Ecommerce Cost

Section 1.1.1 – Four-Party Card Networks

Section 3.3.2 – Card-Not-Present Operational Complexities: Transaction Authorization, Capture, and Settlement

Section 1.1.2 – Three-Party Card Networks Section 1.2 – Global Cost Observations

Section 3.3.3 – Tokenization Dynamics 68 Section 4 Overview – Payment Methods Around the Globe 74 Section 4.1 – Payments Mix by Region 76 Section 4.1.1 – Payments Mix in the Americas 77 Section 4.1.2 – Payments Mix in Europe and the Middle East 78 Section 4.1.3 – Payments Mix in Asia-Pacific 79 Section 4.2 – Credit and Debit Cards around the World 80 Section 4.2.2 – Credit and Debit Cards in EMEA 82 Section 4.2.3 – Credit and Debit Cards in APAC 83 Section 4.2.4 – Credit and Debit Cards Summary 83 Section 4.3 – The Future of Cash 83 Section 4.3.1 – Cash in the Americas 83 Section 4.3.2 – Cash in EMEA 84 Section 4.3.3 – Cash in APAC 85 Section 4.4 – Digital Payment Methods 86 Section 4.4.1 – Local Payment Methods (LPMs) 86 Section 4.4.2 – Digital Payment Methods Global Developments 88 Section 4.4.3 – Pix Case Study (Brazil): The Poster Child for a Successful APM 93

Section 1.2.1 – Case Study: Payment Costs in the United States

Section 1.2.2 – Cost of Cash vs. Debit Cards Case Study

Section 2 Overview – The Payments Supply Chain

Section 2.1 – The Card Issuing Industry

Section 2.1.1 – Card Issuing Market Shares in the Americas

Section 2.1.2 – Card Issuing Market Shares in EMEA

Section 2.1.3 – Card Issuing Market Shares in APAC

Section 2.1.4 – U.S. Case Study

Section 2.2 – The Card Acquiring Industry Section 2.3 – Card Network Industry Overview

43 46

Section 2.3.1 – Card Networks in the Americas

Section 2.3.2 – Card Networks in EMEA

Section 2.3.3 – Card Networks in APAC

Section 3 Overview – Understanding Ecommerce Section 3.1 – In-Store vs Online Commerce Growth Patterns

Section 3.1.1 – Ecommerce Mobile Device Payments – Recent Trends

CMSPI – IAC State of the Industry Report

Glossary

139

Section 5 Overview – Payments and Regulation

96 99 100

Processes

139

Section 5.1 – Types of Government Intervention

Exception Processes

140

Section 5.1.1 – Interchange Caps

Set-Up/Operations

141

Section 5.1.2 – Co-badging/Dual Network Routing Regulation

105

Parties

142

Section 5.1.3 – Price Signaling: Discounting, Surcharging, and Steering

107

Economics

143

Section 5.1.4 – Government-Mandated Payments

109

Miscellaneous

144

Section 5.1.5 – The Challenges of Regulating Payments

109

Payment Methods

145

Section 5.2 – Payments Industry Regulation in the US

110

Appendix

146

Section 5.2.1 – Interchange Caps

110

Index

154

Section 5.2.2 – Card Co-Badging and Routing

112

Section 5.2.3 – Discounting and Surcharging

116

Section 5.3 – Payments Industry Regulation in Europe

118

Section 5.3.1 – Interchange Caps in Europe

118

Section 5.3.2 – Co-Badging and Routing in Europe

119

Section 5.3.3 – Discounting and Surcharging in Europe

122

Section 5.4 – Payments Industry Regulation in Australia

122

Section 5.4.1 – Interchange Caps in Australia

122

Section 5.4.2 – Co-Badging and Routing in Australia

126

Section 5.4.3 – Discounting and Surcharging in Australia Section 5.5 – Payments Industry Regulation in Japan

131

133 137

Section 5.6 – Risks and Outcomes from Each Policy Intervention

Section 5.6.1 – Interchange Caps

137

Section 5.6.2 – Co-Badging

137

Section 5.6.3 – Surcharging

138

Section 5.7 – Conclusion

138

CMSPI – IAC State of the Industry Report

Methodology CMSPI’s Insights team has synthesized a wide range of publicly-available sources and conducted expert analysis to generate the SOIR. Wherever possible, global case studies are used to illustrate overarching trends. Throughout, a strong focus is placed on the U.S. given its instrumental role in the development of card-based payments infrastructure and the latter’s so-far unrivaled dominance in the global payments industry. Core Findings • Section 1 - In Section 1, we start with the basics of the market for card payments, unpacking the main parties involved in the transaction flow, the purposes they serve, and how they are paid around the world. For many merchants, the cost of accepting card payments has ballooned in recent years, fueled by growth in higher-cost payment methods, rising Card Not Present volumes, and increases to largely-non-negotiable fees • Section 2 – In Section 2, we take three key supply chain parties – card issuers, acquiring banks, and networks – and dive into the performance of some of the largest on the market. On average, the profit margins of the largest card issuers, acquirers and networks significantly exceed those of merchants. In the case of issuers, there is evidence that only a portion of revenue from card payments is used to fund benefits for consumers. • Section 3 - In the wake of the COVID-19 pandemic, the growth rate of global ecommerce has slowed but remains positive, leading to an increase in transactions with disproportionately higher associated costs and risks. In Section 3, we explore the implications of online purchases for payments, the distinction between Card Present and Card Not Present transactions, and the growing payments technologies that blur the distinction between the digital and physical worlds. Although ecommerce exists almost everywhere today, consumers exhibit strongly differentiated payment habits around the globe. • Section 4 - In Section 4, we take our analysis to the country level, analyzing markets across Europe, the Middle East, the Americas, and Asia to see how customer preferences have produced distinct patterns for merchants to contend with. Regions - and even countries - cannot be treated as homogenous when it comes to payments; payment method preferences continue to diverge significantly at the country level despite pushes towards interoperability and unified frameworks. • Section 5 – In Section 5, we address the entities responsible for balancing it all (absent voluntary industry improvements): regulators. With particular focus on the U.S., Europe, Australia and Japan, Section 5 looks at four diverging approaches to payments regulation, highlighting how each affected merchants and, in turn, end users. The results – payments regulation can be vulnerable to regulatory arbitrage, with increases to non- regulated fees and limited enablement of relevant technologies observed in multiple case studies, leading many regulators towards a competition-first approach.

Executive Summary The Backdrop

Since 1950, when Diner’s Club was introduced in New York City as the first charge card, electronic payments have come a long way in customer offerings, issuance and acceptance technologies, and total global payment volume. In 2023, there were 687 billion global card network transactions. 1 Furthermore, ecommerce grew an estimated 41% between 2019 and 2022 across countries analyzed in this report. 2 Behind the card – the most prominent electronic payment method in most geographies – lies a complex web of infrastructure rules and practices that have shaped the structure of the payments industry. The CMSPI Insights Advisory Council State of the Industry Report (SOIR) seeks to educate industry stakeholders and demystify the rapidly changing global payments landscape. Our Purpose Where payments were once a means to an end, ordering processes, return flows, and checkouts are now a strategic differentiator for businesses. For many, payments are also the second-largest operational cost after labor. 3 However, as complexity compounds in an industry, so too can barriers to entry and asymmetric information. The result? A highly-specialized industry, with profit margins over 40% reported by some of its largest stakeholders (See Section 2). In that environment, merchants – despite paying $224 billion in annual fees to accept cards in the U.S. alone - can be some of the least informed when it comes to the fundamentals that underpin the services they pay for, with obfuscation and complexity among the underlying challenges merchants face. CMSPI’s first State of the Industry Report aims to equip them with that information.

1 https://www.statista.com/statistics/261327/number-of-per-card-credit-card-transactions-worldwide-by-brand- as-of-2011/#:~:text=Nearly%20four%20out%20of%2010,transactions%20per%20day%20in%202023. 2 CMSPI analysis of Worldpay Global Payments Reports (2020-2023) 3 NRF | Retailers Say Small Businesses Are Hardest Hit by Rising Credit Card Swipe Fees

Please note terms and definitions are provided in the Glossary for your reference.

CMSPI – IAC State of the Industry Report

Section 1 Overview A Primer in Payments

The Numbers • $224bn

The estimated cost of fees paid by merchants to accept card payments in the U.S. in 2023, inclusive of interchange, network fees, and processor fees 6 • 2 percentage point How much higher the average cost of accepting a credit card transaction is in Japan than in the EU-12 7 • $49bn How much less U.S. merchants would have paid to accept 2023’s payments transactions if both fees and the payments mix had stayed at 2009 levels 8 • 45% The average share of the Merchant Service Charge attributable to interchange fees in Europe 9

The world has come a long way since 1950, when Frank McNamara forgot his wallet while out to dinner in New York and the first payment card was born. 4 Today, in many countries those cards are responsible for the vast majority of payments, with 687 billion global card network transactions occurring in 2023. 5 Behind the card, however, lies a complex web of infrastructure, rules and practices that have shaped the structure of the payments industry as we know it. In this section of CMSPI’s State of the Industry Report, we provide the backdrop that onlookers need to understand the payments market of today.

The Questions • Which parties are involved in making a transaction happen, and how are they paid?

• How has the cost of payments acceptance grown over time? • How do card fees differ by country and payment channel? • What are dual and single-message transactions?

The Findings • Of the countries analyzed, Japan and the U.S. have some of the highest fees for accepting card payments • Costs to accept card payments can be significantly higher online • In the absence of regulation or co-badging, the interchange and network components of card fees are largely non-negotiable for merchants

6 CMSPI estimates and analysis 7 CMSPI estimates and analysis 8 CMSPI estimates and analysis 9 CMSPI estimates and analysis

4 When Were Credit Cards Invented? | Capital One 5 https://www.statista.com/statistics/261327/number-of-per-card-credit-card-transactions-worldwide-by-brand- as-of-2011/#:~:text=Nearly%20four%20out%20of%2010,transactions%20per%20day%20in%202023.

CMSPI – IAC State of the Industry Report

Section 1– An Overview of Payments Section 1.1 – A Model of Card Payments The majority of payments in many countries are made via card (see Section 4.1) and as a result this paper will primarily focus on card payments. Card payments fall into two distinct categories, each with their own unique set-ups and merchant fee structures: four-party and three-party card networks. Section 1.1.1 – Four-Party Card Networks The four parties in the Four-Party Card Network model are consumers, issuers, merchants and acquirers. Merchants typically interact directly only with their customers and their card acquirer – they generally do not directly interact with networks or issuers. Card networks usually act as “referees” in the four-party system by sending transaction information between issuers and acquirers and creating network rules for all participants in the system. The figure below shows how the four parties interact in a typical transaction.

WHO ARE THE KEY PLAYERS? An acquirer, also known as a ‘merchant acquiring bank’ or a card processor, is a bank or financial institution that manages the technical acceptance of payment cards for the merchant and ensures that funds from the cardholder are transferred to the merchant’s account. The issuer, also called the ‘cardholder’s issuing bank’, is typically a bank, credit union, or financial institution that supplies a consumer with a payment card to facilitate card transactions and represents the customer in those transactions. A card network, also known as a card scheme, such as Visa or Mastercard, acts as an intermediary that enables communication and transaction processing between the issuer and the acquirer. These networks set the rules and standards for transaction authorization and facilitate the secure transfer of funds between parties.

Gateway

Network

Merchant

Card Acquirer

Card Issuer

Consumer

Gateway Fees, Acquirer Fees, Network Fees, Interchange Fees

Network Fees, Interchange Fees (passed through to merchant)

Network Fees, Rewards/Cashback

Pays

Account Fees

Interchange Fees, Account Fees

Receives

Rewards/Cashback

Gateway Fees

Acquirer Fees

Network Fees

Sets the Level Of

Network Fees, Inerchange Fees

Gateway Fees

Acquirer Fees

Figure 1.2 – The roles of key stakeholders in the four-party card system

Figure 1.1 – Four-Party Card Network Model

CMSPI – IAC State of the Industry Report

HOW NEGOTIABLE ARE CARD FEES? While interchange fees and network fees set by card networks in a four-party model are typically non-negotiable, these fees can occasionally be directly negotiated by merchants in certain markets, but it usually requires an act of regulation and/or direct network competition on a given card transaction. Germany’s Girocard is an example of a domestic debit card network that negotiates directly with merchants (see Section 5.3.2). The acquirer fee is the only truly negotiable aspect of the MSC, and as a result these fees tend to fluctuate significantly between merchants, with higher rates generally paid by smaller merchants and merchants that may pose a risk of default to acquirers. Section 1.1.2 – Three-Party Card Networks In a three-party card network, one entity often performs the role of acquirer, issuer and network. These financial institutions contract directly with merchants and consumers, in addition to providing their own payments infrastructure. Prominent examples of three-party networks include American Express and Discover. 11 Fee structures are generally simpler for a three-party card network, since there is usually only one entity being paid. As a result, there is no need for separate interchange, network and acquirer fees; merchants tend to be levied one single fee for each transaction. 12

WHAT IS MERCHANT SERVICE CHARGE? The Merchant Service Charge (MSC), sometimes known as the Merchant Discount Rate (MDR) in the U.S., is a term given to fees levied on a merchant when accepting a card transaction. The MSC generally consists of three main fees for each transaction, each flowing to a different stakeholder in the payments system. • Interchange is typically the largest cost within the MSC and is the fee that the card-issuing bank receives from the acquirer, or processor. Interchange fees are usually set by the card network. • Network fees, or scheme fees, are the charges levied by the card networks on the merchant acquirer. 10 • The acquirer cost, or processor cost, is the fee the acquirer, or processor, receives from the merchant. The acquirer adds the interchange fee and the network fee to the acquirer costs, which is then passed on to the merchant as the MSC.

EXEMPLARY CARD FEES STRUCTURE Interchange Fee

Network Fee

Processor Fee

Note: % share of each type of fee varies by country, type of merchant and other factors

75%

20%

Figure 1.4 – Three-Party Card System

Figure 1.3 – Typical Card Fee Structure in the U.S.

11 CMSPI understands both American Express and Discover have partnerships with third-party issuers, which may be considered a 4-party model. 12 In some instances, merchants will use other processing partners to facilitate a 3-party transaction, but still the combi- nation of interchange and network fees into a single cost simplifies the fee structure.

10 Card networks typically levy fees on both the issuing bank and the acquiring bank. The scheme fees levied on the issuing bank are not included in the MSC.

CMSPI – IAC State of the Industry Report

Section 1.2 – Global Cost Observations The competitive dynamics between card networks often lead to an escalation of fees in the four-party card model. This is because networks can use higher interchange fee revenues as a mechanism to attract banks to issue cards with their networks. Meanwhile, the ubiquitous nature of cards from the world’s largest networks and strict network rules means most merchants are compelled to accept these cards unanimously despite the associated fees. The phenomenon of competition leading to higher prices has proved to be an issue in the four-party card market across the world and explains why there has been a strong regulatory focus in many jurisdictions (see Section 5). 13 COMPARISONS BY COUNTRY A comparison of average card fees globally shows a huge fluctuation between countries, (Graph 1.1). Our data suggests merchants in the U.S. and Japan incur far higher credit card fees than merchants in other countries. We believe a significant factor in this is the hands- off regulatory approaches that have been taken in these countries (Graphs 1.2 and 1.3). Please see Section 5 for an exploration of global regulatory regimes.

WHAT’S A DUAL-MESSAGE TRANSACTION VS. SINGLE-MESSAGE TRANSACTION? Dual-message transactions are sent via the merchant’s acquirer to the issuer for approval with two distinct messages – an authorization request to authorize the customer’s account, and a separate settlement message to withdraw the customer’s funds. With dual-message functionality, merchants can process transactions wherein the final settlement amount is different from the authorization amount, such as transactions involving a tip. In the U.S., these transactions are typically non-routable between networks (see Section 5.2.2) and exhibit greater upward pressure on costs. The challenge for most observers is that while domestic networks have introduced dual-message routing solutions that can compete directly with the global networks, issuance and availability of those solutions have been limited. Single-message transactions are those wherein the authorization and settlement message are sent in a single message from the acquirer to the issuer. In the U.S. these are typically PIN-authenticated and routable between networks, therefore exhibiting greater downward pressure on merchant costs (see Section 5.2 for more information about this).

Single-Message Debit

Dual-Message Debit

3.50%

3.00%

Authorization & settlement occur simultaneously

Authorization & settlement occur separately

2.50%

2.00%

1.50%

PIN authentication

Signature authentication

1.00%

0.50%

Local Networks (w/ some global)

Global Networks (w/ some domestic)

0.00%

UK 2018 Credit and Debit

EU-12 2022 Debit

EU-12 2022 Credit

Japan 2021 Credit

Canada 2023 Debit

Canada 2023 Credit

Australia 2021 Debit

Australia 2021 Credit

USA 2023 Debit

USA 2023 Credit

China 2023 Debit

China 2023 Credit

New Zealand 2023 Credit

Mexico 2023 Debit

Mexico 2023 Credit

Interchange Network Fee Acquirer Fee Total MSC

Figure 1.5 – Dual-Message Debit v. Single-Message Debit

Graph 1.1 – Comparison of Average Card Fees Globally 14 15

13 briefings-psr-briefingoct2014.pdf (kansascityfed.org) 14 CMSPI analysis and estimates. This chart is based on data availability. For example, the UK’s Payment Systems Regulator (PSR) has not published an updated breakdown of card fee costs since 2018. 15 Average Credit Rates are exclusively Visa and MasterCard averages

CMSPI – IAC State of the Industry Report

$8,000

3.50%

2.50%

$14,000

Unregulated Market

$7,000

3.00%

$12,000

$6,000

2.00%

2.50%

$10,000

Regulated Markets

$5,000

2.00%

Voluntary Commitments

1.50%

$8,000

$4,000

Regulated Markets

1.50%

$3,000

$6,000

1.00%

$2,000

$4,000

0.50%

$1,000

0.50%

$2,000

0.00%

USA Japan Mexico Canada Australia New Zealand

UK EU-12 China

0.00%

Mexico

USA Canada

Australia

EU-12

China

Interchange

Network Fee

Acquirer Fee

Total MSC

Market Size

Interchange

Network Fee

Acquirer Fee

Total MSC 2023 Market Size (USD bn)

Graph 1.2 – Credit Card Fees by Country, Market Size and Regulation Status 16 17

Graph 1.3 – Debit Card Fees by Country, Market Size and Regulation Status

Section 1.2.1 – Case Study: Payment Costs in the United States The weighted average cost of payments acceptance is increasing for U.S. merchants. In the U.S., CMSPI estimates the average cost of payments has risen from 1.36% in 2009 to 1.70% in 2022, corresponding to $49 billion in like-for-like additional costs for U.S. merchants annually. We believe this is being driven by two main factors: rising card fees and a changing payments mix.

16 Please see Section 5 for an overview of credit card interchange voluntary commitments in Canada 17 Average Credit Rates are exclusively Visa and MasterCard averages

CMSPI – IAC State of the Industry Report

1.80%

1.70%

1.60%

1.50%

1.40%

1.30%

1.20%

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Graph 1.4 – The Cost Conundrum: Weighted-Average Cost of Payment Acceptance 18

Graph 1.5 – U.S. Card Acceptance Fees 19

Tables 1.1 to 1.4 show a breakdown of the $224 billion 20 in 2023 U.S. card fees paid. Credit card fees significantly outweigh debit card fees, which is explored in more detail when looking at regulation in Section 5.1. We can see card-not-present (CNP) fees outweigh CP fees, despite higher CP volumes. Nearly $8 billion was paid in international interchange and network fees in 2023, despite it only constituting around 2% of U.S. card volume.

1.Rising Card Fees Since 2011, U.S. retailers have experienced a significant and continual increase in card acceptance costs, primarily driven by volume increases and rises in unregulated network and interchange fees. Based on CMSPI’s analysis, it is estimated that U.S. merchants paid over $224 billion to interchange, network, and processor fees in 2023. Notably, interchange fees alone amounted to $143 billion, network fees totaled $19 billion, processor fees were $30 billion while three-party card fees summed to $32 billion. $163 billion, or 72%, of total U.S. card fees were incurred on credit cards, whose interchange and network fees remain unregulated (see Section 5.2). Interchange and network fees on single-message debit, where co-badging and routing is widely available, was less than $10 billion of the $224 billion total, despite representing around half of card- present (CP) debit spend.

Total $87.8 $43.2

Credit:

Interchange

Network

Acquirer

Visa

$70.6 $34.8

$7.2 $3.7

$10.0

Mastercard

$4.7

Amex

$27.0

Discover

$4.5

Total

$105.4

$10.9

$14.7

$162.5

Total $14.1 $47.5

Debit:

Interchange

Network

Acquirer

Single-Message Dual-Message

$7.8

$2.0 $6.3

$4.3

$29.8

$11.4

19 CMSPI Estimates and Analysis. 20 Footnote 20 Sources

18 CMSPI analysis of data from Euromonitor, the Federal Reserve, Card Network 10ks, Payments Cards and Mobile, the Wall Street Journal, Digital Transactions, Chain Store Age, PRWeb, Thrifty Traveler, and Merchants Payments Coalition

CMSPI – IAC State of the Industry Report

Total

$37.7

$8.3

$15.7

$61.6

Section 1.2.2 – Cost of Cash vs. Debit Cards Case Study WHAT IS THE TRUE COST OF CASH FOR MERCHANTS? The cost of cash acceptance for merchants is extremely complicated to accurately calculate. There are several different types of costs to consider, including fixed costs and variable costs, and many of these fluctuate significantly and can be difficult to quantify.

Total $0.0 $0.0

4 Party:

Interchange

Network

Acquirer

$52.4 $90.7

$9.6 $9.6

$30.5

CNP Total

$143.0

$19.1

$30.5

$192.6

• Cash Costs for Merchants

Type

Total $0.0 $0.0

4 Party:

Interchange

Network

Acquirer

Processing cash transactions Stocking registers with cash Cleaning excess cash Changing receipt paper Receipt paper and ink Counting and sorting cash Preparing cash for deposit Transporting and depositing cash

Domestic

$138.4

$15.5

$30.5

International

$4.4

$3.6

Total

$143.0

$19.1

$30.5

$192.6

Front Office

Tables 1.1 – 1.4 – Breakdown of Card Fees Paid in the U.S. in 2023 (USD billions)) 21

2. Changing Payments Mix In the U.S. and many other countries, we have observed a gradual shift away from cheaper payment methods like cash towards more expensive tender types including Buy-Now-Pay-Later (BNPL) and other Alternative Payment Methods, or APMs. We are also seeing the cost of cash increase over time.

Back Office

POS terminals Software to record and analyze payments Buying or leasing cash storage (safes)

Infrastructure

Cash shortage, theft, and counterfeit Theft insurance premiums

Fraud, Losses, and Mitigation

Cash deposits Banknote and coin ordering

21 Footnote 21 Sources

Fees

Table 1.5 – List of Cash Acceptance Costs for Merchants 22

The most comprehensive report on the cost of cash over time available today is provided by the Kansas City Federal Reserve, which has collated studies looking at the evolution of cash costs in six countries: Australia, Canada, the Netherlands, Norway, Sweden and the United States. This

22 Kansas City Fed study

CMSPI – IAC State of the Industry Report

30%

study also looks at the cost of debit card acceptance in these countries for comparison. These are the key conclusions we have drawn from the available cost of cash literature: 1.The cost of cash is rising over time For all 6 countries covered by the Kansas City Fed’s report, the relative cost of cash has risen in recent years (see Graph 1.6). This is perhaps not surprising considering cash volumes are declining in many countries (Graph 1.7), and the cost of cash acceptance for merchants is partly fixed. However, this underlines a challenge that merchants in many countries face with the cost of payments acceptance: it is rising across the board (see Section 1.2). With card fees high and rising in many jurisdictions, and expensive new payment methods such as BNPL entering the market, merchants across the world are continually faced with a rising weighted average cost of payments acceptance.

25%

20%

15%

10%

2016

2017

2018

2019

2020

2021

Australia

Canada

Netherlands

Norway

Sweden

United States

$7.00

$6.50

6.50

Graph 1.7 – Cash Volumes as a Share of Consumer Spending by Country (2016-2021)) 24

$6.00

2. Cash is less expensive to accept than debit cards in the U.S. This is a surprising finding, considering that cash handling is so manual and labor intensive and card payments can be sent instantly with practically no variable costs. However, it is not the case in every country; in fact, in every other country covered by the Kansas City Fed the cost of debit acceptance was lower or equal to the cost of cash acceptance in the most recent year where data was available. This difference is likely explained by approaches to interchange fee regulation (see Section 5).

$5.00

$4.00

$3.00

$2.58

2.58

United States

-147%

$2.00

1.32

$1.32

1.28

$1.28

Sweden

$1.00

55%

0.31

$0.31

0.29

$0.29

$0.24 0.24

0.20

0.19

$0.20

$0.19

0.17

$0.17

0.12

$0.12

$0.00

Norway

Australia 2006 & 2013 Australia 2006 & 2013

Canada 2014 & 2018

Netherlands 2002 & 2009

Norway 2007 & 2013

Sweden 2002 & 2009

United States 1999 & 2018

Canada 2014 & 2018

Netherlands 2002 & 2009

Norway 2007 & 2013

Sweden 2002 & 2009

United States 1999 & 2018

Netherlands

Graph 1.6 – Average Cost per Cash Transaction by Country 23

Canada

Australia

17%

Graph 1.8 – Merchant Cost Difference between Debit Card v. Cash 25

23 Kansas City Fed

24 Euromonitor 25 Kansas City Fed

CMSPI – IAC State of the Industry Report

3. The U.S. is the only country to see a significant increase in debit card costs Despite the Durbin amendment in 2011, which capped debit card interchange fees for large U.S. issuers, there was still a substantial increase in the cost of debit card acceptance for U.S. merchants between 1999 and 2018. This finding demonstrates the challenge U.S. merchants face with card acceptance costs, as regulated debit card fees still significantly exceed cash costs, while credit card fees remain unregulated and are significantly higher still. The way the card industry has responded to U.S. debit regulations has left opportunity for significant improvement in debit transaction costs, with a significant amount of debit cost incurred by (typically) unrouteable dual message debit transactions, as per Table 1.2 (see also Section 5). Should the industry fully enable competitive network routing on debit, CMSPI estimates these costs will drop.

ARE CENTRAL BANK DIGITAL CURRENCIES (CBDCS) THE FUTURE OF CASH? Nordic countries (Norway, Sweden, Finland, Denmark and Iceland) are often considered the world’s most cashless economies. 27 This perhaps means they are best placed to implement Central Bank Digital Currencies (CBDCs): digital currency issued by a country’s central bank. Here, we look at the state of cashless payments and CBDC development across these five countries: Norway • In Norway, 65% of F2F POS transactions were contactless. 28 • Norway’s central bank publicly announced that it was researching digital currency options to help support the switch to a cash-free society. 29 • Norge Bank has been investigating CBDC since 2016 and has concluded Phase 4 with the purpose to “strengthen the decision-making basis for whether CBDC should be introduced by conducting experimental testing of technical solutions and analyzing the purpose and consequences of the introduction of CBDC” 30 • Phase 4 also had recommendations for Phase 5 with the main delivery being “a decision basis for and recommendation as to whether Norges Bank should introduce CBDC and, if so, the recommended type of design and implementation” 31 • The government has proposed rules to meant to ensure that consumers can pay with cash for those are averse to using digital payments. 32

-50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50%

38%

-29%

-34%

-36%

Australia 2006 to 2013

Canada 2014 to 2018

Netherlands 2002 to 2009

Norway 2007 to 2013

Sweden 2002 to 2009

United States 1999 to 2018

Sweden • Sweden began the e-krona project in 2017 and have released their Phase 4 of the e-krona pilot that focused on testing and evaluating whether designing a secure, balanced-offline solution is possible. 33 • The mobile app Swish facilitated 200 billion Krona worth of transactions in 2020. 34

Graph 1.9 – Change in Debit Fees Over Time by Country 26

26 Kansas City Fed

27 Ingenico | The Nordic countries ready to say goodbye to cash 28 Ingenico | The Nordic countries ready to say goodbye to cash 29 Ingenico | The Nordic countries ready to say goodbye to cash 30 https://www.norges-bank.no/contentassets/fb85d452791d4d1a9f04aa4d3c18683d/norges-bank-papers-2--- phase-4---final-report.pdf?v=18122023133556 31 https://www.norges-bank.no/contentassets/fb85d452791d4d1a9f04aa4d3c18683d/norges-bank-papers-2--- phase-4---final-report.pdf?v=18122023133556 32 https://www.pymnts.com/cash/2024/norway-considers-rules-to-ensure-consumers-can-pay-with-cash/ 33 https://www.riksbank.se/en-gb/payments--cash/e-krona/e-krona-reports/e-krona-pilot-phase-4/ 34 https://ingenico.com/en/newsroom/blogs/nordic-countries-ready-say-goodbye-cash#:~:text=Sweden%2C%20 one%20of%20the%20most,10%20per%20cent%5B3%5D.

CMSPI – IAC State of the Industry Report

Finland • 98% of the Finnish population owns a debit card and 63% own a credit card. 35 • Since Finland transacts on the Euro, CBDC research falls under the European Central Bank which started the preparation phase of the Digital Euro in November 2023, expected to last two years. 36

Denmark • 97% of Denmark’s population owns a debit card. 37

• In June 2022 the Central Bank of Denmark published a paper that analyzed new types of digital money. They concluded for retail CBDC, given the associated cost and possible risk, it is not clear how they can add add significant value relative to existing solutions. 38

Iceland • The Central Bank of Iceland in 2018 released a paper at the advantages and disadvantages of CBDC and concluded that the time is right to open discussions on CBDCs and assess the need to digitize cash 39 , but have had no developments since.

Section 1 has showcased the extent of cards fees paid by merchants, and we’ve identified the three main parties to whom they are paid: issuers, acquirers and networks. In Section 2, we’ll look to understand more about these companies by looking into their business models.

35 https://ingenico.com/en/newsroom/blogs/nordic-countries-ready-say-goodbye-cash#:~:text=Swe- den%2C%20one%20of%20the%20most,10%20per%20cent%5B3%5D 36 https://www.ecb.europa.eu/press/pr/date/2023/html/ecb.pr231018~111a014ae7.en.html 37 https://ingenico.com/en/newsroom/blogs/nordic-countries-ready-say-goodbye-cash#:~:text=Swe- den%2C%20one%20of%20the%20most,10%20per%20cent%5B3%5D 38 https://www.nationalbanken.dk/media/z12aimyo/analysis-no-8-new-types-of-digital-money.pdf#search=CB- DC 39 https://www.finextra.com/newsarticle/41859/cbdc-in-the-nordics-what-is-the-status-in-sweden-denmark- norway-finland-and-iceland

CMSPI – IAC State of the Industry Report

Section 2 Overview The Payments Supply Chain

The Findings • Amongst the providers analyzed, profit margins differed significantly by industry segment, with card networks reporting the highest margins on average • Regulatory intervention can have a significant impact on the level of fragmentation in a given geography • For four out of five large U.S. issuing banks analyzed, interchange fee revenue outstripped rewards expenditure The Numbers • 60% The average operating profit margin of the two largest card networks in 2023 40 • 18% The average proportion of five large U.S. issuers’ revenue that comes from interchange fees 41 • 3.09% The average net profit margin of a general retailer in the U.S. 42 • 74% • The share of U.S. consolidated banking assets owned by 29 issuers with >$100 billion of assets 43

Now that we understand how transactions work, it’s time to dive into the players who make them happen. From card issuers, to digital wallet providers, to acquiring banks, hundreds of companies interact every day to take purchase from authorization to settlement. As a merchant, these interconnections mean that you don’t need to have contracted with an industry partner to be directly affected by them. For instance, an outage with a single issuer could affect millions of customers’ ability to pay. Furthermore, the parties involved in payments are often reliant on effective data transmission from competitors, and widespread merger activity means that industry players can become rivals or partners overnight. In this section, we study three key parties in the payments ecosystem: card issuers, payment networks, and acquiring banks. We focus on the card market given its global prominence (see Section 1), and these three actors given their receipt of each component of the Merchant Service Charge (MSC) paid to accept each payment. We analyze their market shares and distinctive roles in different countries, as well as the financial dynamics that underpin their performance. The Questions • How does the market for card issuance compare between different countries? • How have mergers and acquisitions shaped the market for card payments? • How do the profit margins of different payments industry partners compare to that of merchants? • What are the differences between the card networks available in different countries?

40 CMSPI analysis of public financial statements 41 CMSPI analysis of public financial statements 42 Operating and Net Margins (nyu.edu) 43 FRB: Large Commercial Banks-- March 31, 2024 (federalreserve.gov

CMSPI – IAC State of the Industry Report

Section 2 – Profitability in Payments Please note: All company financial data in Section 2 is based on public filings from public companies The card payments industry can be highly profitable. However, merchants on average generate significantly lower operating profit margins than other system participants (see Graph 2.1).

DEFINITIONS • Net Revenue: A firm’s revenue minus discounts from gross revenue. For most companies, Revenue and Net Revenue are identical, but Visa and Mastercard account for client incentives to banks and merchants as a discount. • Operating Income: A firm’s profit after deducting operating expenses such as wages, depreciation, and cost of goods sold. • Operating Margin: Operating Income divided by Net Revenue. A gauge of profitability. • Valuation (Market Cap): The market valuation of a company. The number of shares multiplied by the share price. • Valuation Multiples: Price/Earnings ratio used: Market Cap divided by Net Profit. This is a measure of the valuation premium investors are willing to pay for a stock.

Note: Company valuations based on the stock price at the end of each calendar year

EXCHANGE RATES: Financial information included in this report is communicated in USD. Where companies report in other currencies, we have used the 31st December 2023 USD exchange rate to calculate the dollar values for each year (e.g. 2020 numbers also use the 31st December 2023 exchange rate). This has been done to strip out volatile currency fluctuations from our analysis, and to better expose the underlying financial performance of the companies.

Graph 2.1 – Average Operating Profit Margins of Payments Industry Participants 44

Our analysis suggests the primary reason for this is the competitive landscape. As shown in Sections 2.1 to 2.3, card issuing, acquiring and network markets are all to some degree concentrated with some large companies, which could be attributed to high barriers to entry in these industries causedby high fixed operating costs and network effects. The card market is also a two-sided market with network effects, which lends itself to high levels of concentration. Retail is very different; there are low barriers to entry, and therefore fierce competition and low operating profit margins. This dynamic may explain why merchant advocates in many countries have long called for regulation of the card payment industry, in addition to launching antitrust litigation. This has proven to be a long drawn-out, fiercely debated area, which we will explore in more detail in Section 5. In this section, however, we take a deeper dive into network, acquiring, and issuer market dynamics around the world.

44 CMSPI estimates based on data from NYU Stern and Company 10ks. This only covers the U.S., but CMSPI has observed similar trends in merchant profit margins across several global markets.

CMSPI – IAC State of the Industry Report

Section 2.1 – The Card Issuing Industry In Section 2.1 we look at the financial performance of the top 11 credit and debit card issuers globally; 6 of whom are based in China and 5 in the U.S. 45

Chase, Bank of America, Wells Fargo, Citi and Capital One all had valuation multiples of between 10 and 13x P/E as of the end of December 2023. Large Chinese banks typically trade at a larger valuation premium of over 20x P/E.

60%

50%

Total Card Volume (2022 USD billion)

Global Rank

Issuer

40%

1 2 3 4 5 6 7 8 9

China Construction

$4,003 $2,923 $1,532 $1,463 $1,277

ICBC

30%

Bank of China

20%

JPMorgan Chase Agricultural Bank Bank of America China Merchants

10%

$953 $910 $688 $620 $575 $564

2019

2020

2021

2022

Wells Fargo

JPMorgan Chase

Bank of America

Wells Fargo

China Construction Bank

Agricultural Bank of China ICBC

Communications

Bank of China

China Merchants Bank

Bank of Communications

10 11

Capital One

Citigroup

Capital One

Citi

Table 2.1 – 11 of the Largest Issuers Please note: Many issuers have substantial revenue streams outside of their issuing portfolios. These include interest and overdraft income. In this section, we analyze the financials for the entire entity, which will include this non-issuing income.

Graph 2.2 – Operating Margin by Issuer (2019-2022) 47

Key takeaways: 46 • The card issuing model remains profitable, with circa 35% average operating margins reported • JPMorgan Chase is the strongest U .S. entity in terms of market share and profitability • Issuers consistently report valuation multiples of 10-11x earnings

As the Graphs below show, revenue and operating profits have continued to grow for many card issuers in recent years, despite financial hits for some banks at the start of the covid-19 pandemic in 2020. Operating margins remain solid at most banks, with 35%+ margin numbers consistently posted between 2019 and 2023. Meanwhile, valuations remain remarkably consistent: U.S. banks JPMorgan

45 Euromonitor 46 It’s important to note that large issuing banks may perform several functions aside from card issuing, including net interest payments, overdraft fees and in some cases investment banking activities such as corporate finance and equity/ bond sales & trading. Interchange fee revenue may only constitute a small portion of their overall revenue (see Section 2.1.3).

47 Company 10ks

CMSPI – IAC State of the Industry Report

Section 2.1.1 – Card Issuing Market Shares in the Americas The Figure below breaks down issuing market shares in multiple geographies across the Americas, showing some clear differentiation between countries. Brazil and Chile, for example, have highly concentrated issuer markets. In Brazil, two banks – Banco Itau and Banco Bradesco – cover 50% of the card issuing market. In Chile, three banks – Banco del Estado, Banco Santander and Banco de Credito e Inversiones – have a combined 53% market share. By contrast, although U.S. credit card issuing is concentrated, with the largest 10 credit card issuers holding over 80% of the market, debit card issuing is much more fragmented. Federal Reserve data suggests 39% of U.S. debit card transactions took place with banks with less than $10 billion of assets in 2021, typically small regional banks and credit unions. 50 The Mexican issuing market is also fragmented, with BBVA the only issuer with more than a 10% market share. Canada sits somewhat in the middle: the share of the largest two issuers (Royal Bank of Canada and TD Bank) is high at nearly 40%, but does not match the levels seen in Brazil and Chile.

$0.00 $20.00 $40.00 $60.00 $80.00 $100.00 $120.00 $140.00 $160.00 $180.00 $200.00

2019 2020 2021 2022 2023

Graph 2.3 – Net Revenue by Issuer (2019-2023) 48

0 10 20 30 40 50 60 70

$0 $100 $200 $300 $400 $500 $600

Axis Title

Market Cap

Graph 2.4 – Market Cap and PE Ratio by Issuer (2023) 49 Note: 2022 PE used for China Construction Bank, Agricultural Bank of China, and Bank of Communications

50 Federal Reserve Board Publication

48 Company 10ks 49 Company 10ks

CMSPI – IAC State of the Industry Report

Section 2.1.2 – Card Issuing Market Shares in EMEA Like other regions, European card issuing markets are generally quite concentrated, but there are important nuances. Firstly, there are several issuing markets where the top 5 banks have a combined market share in excess of 50%. These include France, the UK, Spain and Italy. The Netherlands is a hyper-concentrated issuing market, with the top 5 issuers representing nearly 90% of card expenditure, and the top 3 (Rabobank, ING and ABN AMRO) seeing a combined market share of over 80%. The German issuing market looks concentrated at first glance, but a deeper analysis reveals this is not the case: the two largest issuers on our list, Deutscher Sparkassen and BVR, are actually associations of thousands of small German savings banks and cooperative banks respectively. In other countries, savings banks still exist (known as Cajas in Spain or Building Societies in the UK), but there has been a trend of consolidation in recent years. The consolidation trend is similar in the Middle East, with Turkey and Saudi Arabia both markets where the top 5 issuers have total market shares of 60% or more.

Figure 2.1 – Card Market Shares for Issuers in the Americas 51

51 Market shares are based on card transaction value. Some of the names have been shortened for legibility. Chile, Mexcio, and Brazil from Euromonitor 2021. Canada from Euromonitor 2022. U.S. from Euromonitor 2023..

CMSPI – IAC State of the Industry Report

Figure 2.2 – Card Market Shares for Issuers in Europe and the Middle East 52

Section 2.1.3 – Card Issuing Market Shares in APAC Australia has one of the most consolidated issuing markets in the APAC region, with the ‘Big 4’ banks (CBA, Westpac, NAB, and ANZ) accounting for over 80% market share. The issuing markets in South Korea, India, Indonesia and China have similar concentration ratios to each other, with the top 5 holding between 63% and 70% of the market. By contrast, banks in Japan are required to practice region-based relationship banking by the government, resulting in a more fragmented banking industry: the top 5 Japanese banks have a combined market share of slightly less than 50%. 53

52 Market shares are based on card transaction value. Some of the names have been shortened for legibility. Turkey from Euromonitor 2021. France, Italy, Spain, the UK, and the Netherlands from Euromonitor 2022. Germany from Euromonitor 2023. Saudi Arabia network shares from Worldpay Global Payments Report 2023.. 53 https://www.tandfonline.com/doi/full/10.1080/23322039.2015.1017947

Page 1 Page 2-3 Page 4-5 Page 6-7 Page 8-9 Page 10-11 Page 12-13 Page 14-15 Page 16-17 Page 18-19 Page 20-21 Page 22-23 Page 24-25 Page 26-27 Page 28-29 Page 30-31 Page 32-33 Page 34-35 Page 36-37 Page 38-39 Page 40-41 Page 42-43 Page 44-45 Page 46-47 Page 48-49 Page 50-51 Page 52-53 Page 54-55 Page 56-57 Page 58-59 Page 60-61 Page 62-63 Page 64-65 Page 66-67 Page 68-69 Page 70-71 Page 72-73 Page 74-75 Page 76-77 Page 78-79 Page 80-81 Page 82-83 Page 84-85 Page 86-87 Page 88-89 Page 90-91 Page 92-93 Page 94-95 Page 96-97 Page 98-99 Page 100-101 Page 102-103 Page 104-105 Page 106-107 Page 108-109 Page 110-111 Page 112-113 Page 114-115 Page 116-117 Page 118-119 Page 120-121 Page 122-123 Page 124-125 Page 126-127 Page 128-129 Page 130-131 Page 132-133 Page 134-135 Page 136-137 Page 138-139 Page 140-141 Page 142-143 Page 144-145 Page 146-147 Page 148-149 Page 150-151 Page 152-153 Page 154-155 Page 156-157 Page 158-159 Page 160-161 Page 162